Monday, April 18, 2011

Focus on Bi-partisan Fiscal Commission

WASHINGTON, DCMonday, April 18, 2011

www.c-span.org

As both political parties released competing plans to reign in spending, the Washington Journal spends the week examining a bi-partisan proposal released by the National Commission on Fiscal Responsibility and Reform in December.

The 20-member bi-partisan commission, led by former Republican Senator Alan Simpson and former Clinton Chief-of-Staff Erskine Bowles, was chartered by President Obama to come up with ways to reduce the nation's debt and deficit.

Their plan, called "The Moment of Truth," cuts $4 trillion by cutting spending, raising revenue, and reforming entitlements.

After the plan was released, President Obama endorsed some elements but not the entire plan. In his long-term budget proposal released last week, he adopted some of the commission's ideas.

The president's outline proposes $4 trillion in deficit reduction over the next 12 years. It calls for cutting non-security discretionary spending by $770 billion, reducing security spending by $400 billion and repealing Bush-era tax cuts for the "wealthiest Americans." His plan also aims to save $480 billion from Medicare and Medicaid.

To promote those ideas, the President will host three town halls beginning Tuesday in northern Virginia, California and Nevada.

Rep. Paul Ryan (R-WI) was a member of the commission but did not support the final report in part because it kept health care reform in tact. Instead he released his own budget proposal, which passed the house last week with only Republican support.

His plan would cut spending by at least $5 trillion dollars over the next decade by cutting discretionary spending, reforming Medicaid into a block grant program, creating a voucher system for Medicare and reducing taxes.

At 9:15 am EST each day this week, the Washington Journal explores different components of the commission's proposal. Coverage began today with former Budget Committee Chair Rep. John Spratt (D-SC).

Also Monday, the Washington Journal spoke with Douglas Holtz-Eakin, former Chief Economist of the President's Council of Economic Advisors for President George W. Bush.

US credit rating is still AAA, but Standard & Poor’s added a cautionary note because of the nation’s ‘rising government indebtedness.’ Here's a look at some of the budget plans in Congress.

US credit rating: House Budget Committee Chairman Paul Ryan (R) gestures during a news conference at the Capitol in Washington, April 13. Standard & Poor's downgraded its outlook Monday on the United States' sovereign debt, expressing doubts over the ability of Washington to bring the massive federal budget deficits under control in the next three years. J. Scott Applewhite/AP

A report that Standard and Poor’s has lowered its US credit outlook from “stable” to “negative” jolted the New York Stock Exchange and fueled calls for Congress and the White House to come to terms on a solution to America’s soaring debt.

While maintaining its AAA rating on US debt, the rating agency added a cautionary note due to the nation’s “rising government indebtedness” – and the prospect that Congress and the White House will not deal with it. It’s a signal that if a political deal is not reached by 2013, the US credit rating could be downgraded, triggering higher interest rates and deepening the debt crisis.

“There is a material risk that US policymakers might not reach an agreement in how to address medium- and long-term budgetary challenges by 2013,” Standard and Poor’s concluded.

In response, the White House insisted that progress is being made toward a bipartisan agreement. “We think the political process will outperform S&P expectations,” said White House press secretary Jay Carney at a briefing Monday. “The fact is when the issues are important, history shows that both sides can come together and get things done,” he added.

In fact, Washington is awash with plans to rein in deficits. Last week, President Obama called for $4 trillion in deficit reduction over 12 years. Republicans call for $4 trillion over 10 years. Although those figures may be close, the approaches are starkly different.

On Friday, the House voted on five budget plans for fiscal year 2012, each with dramatically different strategies to resolve the nation’s fiscal woes. Here are details of those five plans:

• The GOP leadership plan, developed by House Budget Committee chair Paul Ryan (R) of Wisconsin, lowered both individual and corporate tax rates and capped government spending as a percentage of gross domestic product. It also significantly overhauled Medicare and Medicaid, shifting costs to individuals and the states. It passed with no Democrat votes, 235 to 193.

• Democrats on the House budget panel, led by Rep. Chris Van Hollen of Maryland, aimed to bring the budget back toward “primary balance” by fiscal year 2018 by freezing nondefense spending for five years, ending tax breaks to oil and gas industries, and not renewing the Bush-era tax cuts. It failed 166 to 259, with no Republican votes.

• GOP conservatives proposed even deeper cuts in entitlement programs: They’d increase the retirement age for Social Security to 70 and raise the eligibility age for Medicare to 67. It failed 119 to 120, with no Democratic votes. (In a last-minute maneuver, all but 16 Democrats voted “present” – a move that could have allowed the measure to defeat the more moderate Ryan proposal.)

• The Congressional Black Caucus aimed to cut deficits by nearly $3.96 trillion over 10 years, mainly by increasing revenue – ending, specifically, the Bush-era tax cuts on the wealthy. It failed 103 to 303. Seventy-five Democrats voted with all Republicans in opposition.

• The Congressional Progressive Caucus outlined the reduction of deficits by $5.7 trillion over the next 10 years, mostly by increasing taxes by some $4 trillion and cutting defense spending by $2.3 trillion. The measure failed 77 to 347, with 108 Democrats joining all Republicans in opposition.

Fiscal watchdog groups welcomed the new interest on Capitol Hill in presenting detailed plans for dealing with the debt crisis. For years, Congress has been criticized for failing to produce plans with an aim to cut deficits and spending. But the need now, the observers say, is to hammer out a political settlement.

“It’s gratifying to see lots of plans. Now it’s necessary to put out plans that are actually viable – that lend themselves to political compromise, not just to where [sponsors] sit in the world of politics,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

“We’ve had some really good advice from outsiders; we now need decisionmakers to start putting together a deal,” she adds.

Last week, Mr. Obama called for new House-Senate negotiations on deficit reduction, chaired by Vice President Joe Biden. Democratic leaders have announced their appointments to these talks, while Republicans so far have not.

"[The S&P] announcement is yet another reminder that financial markets are closely watching efforts by the President and Congress to reduce the deficit in order to promote economic recovery and create jobs,” said House Democratic leader Nancy Pelosi in a statement.

Standard & Poor's warning that it could downgrade the AAA rating on U.S. debt in the next two years jolts financial markets. The warning comes even as a new sense of realism emerges in the stalemate between President Obama and congressional Republicans over fiscal policy.

April 18, 2011, 6:18 p.m.

Traders work the floor on the New York Stock Exchange. Investers in stocks appeared to moderate their view on the effect of S&P's announcement. (Brendan McDermid/Reuters)

Reporting from Washington and Los Angeles—

An unexpected warning about America's soaring debt jolted financial markets and is threatening wider consequences for the U.S. economy, even as a new sense of realism emerges in the stalemate between President Obama and congressionalRepublicans over fiscal policy.

The shot across the government's bow came from Standard & Poor's, a leading credit rating firm, which served notice that there was a 1-in-3 chance that it would lower the now-sterling AAA credit rating on U.S. debt in the next two years.

The mere prospect of such a downgrade, which until recently was considered unthinkable, could drive most U.S.interest rates higher, imposing new strains on consumers and the still-fragile economic recovery.

The White House dismissed S&P's move Monday as a political gesture that failed to recognize America's long history of political opponents' coming together in times of crisis. And after weeks of often bellicose sparring, there were signs that just such an edging together might be underway — at least on the most immediate issue of raising the debt ceiling — thanks in part to lobbying by business groups.

In recent days, GOP congressional leaders as well as the president have issued pledges to get the ceiling raised in a timely fashion. Obama acknowledged that an agreement would entail new commitments on deficit reduction and Republicans promised to find common ground even though they still have huge differences with Democrats on spending and taxes.

"This debate has moved into a different realm," R. Bruce Josten, chief lobbyist for the U.S. Chamber of Commerce said in an interview. His organization and other business groups have been working hard to persuade Republicans not to hold up debt ceiling legislation.

Josten said he had become more optimistic that a damaging confrontation could be avoided, though he said difficult negotiations lay ahead.

"There are so many negotiations over concessions that it is like a plate-spinning contest," he said. Still, regarding the likelihood of a deal, Josten said, "I think it's going to happen."

What lay behind the change in Washington's political climate appeared to be a growing recognition on both sides that failure to raise the debt ceiling and offer at least the possibility of a less partisan approach to the overall deficit problem could have severely damaging consequences for the economy — and for politicians.

The national debt will hit its $14.3-trillion ceiling — its current legal cap — in a matter of weeks.

Josten and other business leaders have been conducting a low-profile but intense lobbying effort to bring aboard skeptical conservatives in Congress, many of whom the business groups backed financially in last year's election.

In addition to one-on-one lobbying, the Chamber of Commerce has brought prominent business leaders to Washington to drive home the seriousness of the debt limit issue.

"If the United States actually defaults on our debt, it would be catastrophic," Jamie Dimon, chief executive of JPMorgan Chase & Co., warned at a recent chamber forum in Washington. "If anyone wants to push that button … they're crazy."

The action by S&P, coming on a day when markets abroad already were fretting over Europe's debt woes, unnerved investors, many of whom — like the American public — have long regarded the spiraling U.S. debt as a problem for the future, not the present.

S&P's warning, however, raises the risks that global investors will view U.S. government bonds as riskier than they do now, forcing the Treasury to pay higher interest rates on newly issued debt. That could mean higher interest costs for American consumers and businesses as well.

"It's a serious step," said Chris Rupkey, senior financial economist at the Bank of Tokyo-Mitsubishi in New York. At a time when rising energy costs are weighing on businesses and consumers, he said, "this is another head wind facing the economy."

But the possibility of a drop in the nation's credit rating didn't play out on Wall Street entirely as might have been expected. Market interest rates on U.S. Treasury bonds initially rose after S&P issued its statement Monday, but then quickly fell back, demonstrating that the securities are favorite hiding place for many investors in times of global turmoil.

Investors in stocks also appeared during Monday's trading session to moderate their view on the effect of S&P's announcement. The Dow Jones industrial average closed down 140.24 points, or 1.1%, to 12,201.59, paring what had been a 248-point drop.

Publicly, leaders of both parties reacted to S&P's report with partisan criticisms. "S&P sent a wake-up call to those in Washington asking Congress to blindly increase the debt limit," said Rep. Eric Cantor (R-Va.), the House majority leader.

But behind the scenes, the ratings shift looked to spur the two sides to move toward a middle ground.

In its report, S&P expressed skepticism that Republican leaders and the president, who have proposed dueling deficit-cutting plans in recent days, could come together. "The gap between the parties remains wide," S&P analysts wrote.

S&P's main rival in the debt-rating business, Moody'sInvestors Service, on Monday maintained its "stable" outlook on the nation's credit rating. Moody's analyst Steven Hess said that despite the gulf between the Obama administration's deficit-reduction plan and that of Republican leaders, "The two proposals together represent a significant shift in the U.S. fiscal debate."

The Moody's analyst called the proposals "a turning point that is positive for the long-term fiscal position of the U.S. federal government."

White House spokesman Jay Carney suggested that the warning from S&P might even serve as a useful reminder to Congress that failing to raise the debt ceiling carries grave consequences.

"I would say that any call for a bipartisan agreement on deficit reduction — fiscal reform — is a welcome one and in that context it adds to what we believe is some momentum toward that end," Carney said.

Some congressional leaders gave little indication of moving from their hard-line positions, but others said the downgrade warning was evidence of the need to resolve partisan disputes and swiftly improve the nation's fiscal outlook.

Ireland’s bonds led a third day of declines by the securities of Europe’s most indebted nations after Moody’s Investors Service cut the nation’s credit rating to the lowest investment grade.

The spread between Greek 10-year debt and equivalent German securities widened to 10 percentage points, while Spanish bonds slid for a third day. German two-year notes declined as data showed European inflation accelerated. Moody’s today lowered Ireland to Baa3 from Baa1 and left its outlook negative, meaning more cuts will probably follow. A report yesterday cited German Finance Minister Wolfgang Schaeuble as saying Greece may need to renegotiate its debt burden.

“We’ve had quite a lot of bad news about the peripherals in the past couple of days,” said Glenn Marci, a strategist at DZ Bank AG in Frankfurt. It “was a lot of bad news in a short period of time, and the spreads are suffering a lot.”

Ireland’s credit rating was cut two levels by Moody’s as the government struggles to lower thebudget deficit and restore economic growth. Ireland now shares the same rating as Iceland,Tunisia, Romania and Brazil.

Portuguese yields reached new records amid concern that nations in the euro region will be forced to restructure their debts. The Iberian nation last week followed Greece and Ireland in requesting financial aid as it attempted to stem surging borrowing costs.

Greek Austerity

The extra yield investors demand to hold Greek 10-year debt instead of equivalent German securities surpassed 1,000 basis points, the most since before the euro’s debut in 1999, and the 10-year yield climbed to a new record high of 13.83 percent. The government announced 76 billion euros in austerity measures and state-asset sales to meet budget-deficit goals.

“The level of Greek yields is shocking,” wrote ING Groep NV rate strategist Alessandro Giansanti in an e-mailed note. “What is worrying the market is the Greek government’s ability to collect revenues and the difficulty to reduce the expenditure.”

Nouriel Roubini, the New York University professor who predicted the global financial crisis, said restructuring of Greek government debt is a matter of time.

‘When, Not If’

“The issue of Greece is not whether there will be debt restructuring, but when it will be done,” he said today at a conference in Almaty, Kazakhstan’s financial center. “One can make the same argument for Portugal’s government and Irish banks,” he said.

John Lipsky, the International Monetary Fund’s No. 2 official, said that “the markets have their doubts” about the bailout programs in Greece and Ireland.

“No one ever expected that a program as strenuous as the Greek program would receive immediate endorsement by the markets. They want to see delivery,” Lipsky said in an interview on Bloomberg Radio.

Euro-Region Inflation

Spanish 10-year yields rose nine basis points to 5.42 percent, amid mounting investor concern that Portugal’s bailout won’t stop the debt crisis from spreading. The difference in yields between Spanish and German 10-year debt widened for a fourth day to as much as 205 basis points.

German debt rose even after data showed euro-region inflation accelerated to the most in more than two years.

Consumer prices in the 17-nation euro region rose 2.7 percent in the year to March, up from a 2.4 percent pace in February, the European Union’s statistics office in Luxembourg said today. That’s above an initial March estimate of 2.6 percent and the fastest since October 2008. Euro-area exports rose 1.6 percent in February from the previous month, a separate report showed.

The benchmark German 10-year bund yield dropped five basis points to 3.38 percent.

On Jan. 8, 1835, all the big political names in Washington gathered to celebrate what President Andrew Jackson had just accomplished. A senator rose to make the big announcement: "Gentlemen ... the national debt ... is PAID."

That was the one time in U.S. history when the country was debt free. It lasted exactly one year.

By 1837, the country would be in panic and headed into a massive depression. We'll get to that, but first let's figure out how Andrew Jackson did the impossible.

It helps to remember that debt was always a choice for America. After the revolution, the founding fathers debated whether or not to just wipe clean all those financial promises made during the war.

Deciding to default "would have ruined our credit and would have left the economy on a very agricultural, subsistence basis," saysRobert E. Wright, a professor at Augustana College in South Dakota.

So the U.S. agreed early on to consolidate the debts of all the states — $75 million.

During the good times, the country tried to pay down the debt. Then there would be another war, and the debt would go up again. The politicians never liked the debt.

"What the battle was really about was how quickly to pay off the national debt, not whether to pay it off or not," Wright says.

But, just like today, it wasn't easy for politicians to slash spending — until Andrew Jackson came along.

"For Andrew Jackson, politics was very personal," says H.W. Brands, an Andrew Jackson biographer at the University of Texas. "He hated not just the federal debt. He hated debt at all."

Before he was president, Jackson was a land speculator in Tennessee. He learned to hate debt when a land deal went bad and left him with massive debt and some worthless paper notes.

So when Jackson ran for president, he knew his enemy: banks and the national debt. He called it the national curse. People ate it up.

In Jackson's mind, debt was "a moral failing," Brands says. "And the idea you could somehow acquire stuff through debt almost seemed like black magic."

So Jackson decided to pay off the debt.

To do that, he took advantage of a huge real-estate bubble that was raging in the Western U.S. The federal government owned a lot of Western land — and Jackson started selling it off.

He was also ruthless on the budget. He blocked every spending bill he could.

"He vetoed, for example, programs to build national highways," Brands says. "He considered these to be unconstitutional in the first place, but bad policy in the second place."

When Jackson took office, the national debt was about $58 million. Six years later, it was all gone. Paid off. And the government was actually running a surplus, taking in more money than it was spending.

That created a new problem: What to do with all that surplus money?

Jackson had already killed off the national bank (which he hated more than debt). So he couldn't put the money there. He decided to divide the money among the states.